Citation: 2009 TCC 224
Date: 20090423
Docket: 2008-1658(IT)I
BETWEEN:
RONALD E. JARVIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1]
In November 1966 the
Appellant purchased a life insurance policy (the “Policy”) from the
Prudential Assurance Company Limited.
[2]
The Policy was described
as an Endowment to Age 60 type of policy. The Policy number was 7224220.
[3]
The Appellant was
required to pay annual premiums of $260.00 per year commencing in December
1966. All of the premiums were paid by the Appellant for 40 years.
[4]
The
Policy provided that if the Appellant survived until November 28, 2006 he would
receive the Sum Assured ($10,000.00) increased by any paid up additions.
[5]
Mutual Life Insurance
Company purchased the shares of Prudential Assurance Company. Sometime
later Sun Life Assurance Company of Canada (“Sun Life”)
purchased the shares of Mutual Life Insurance Company. As a result of these
transactions the Appellant became a policyholder of Sun Life, under the new
policy number LI-8024,
992-5.
[6]
By letter dated
November 10, 2006, the Appellant was advised by Sun Life that the Policy will
mature on November 28, 2006 (Exhibit A-5). The letter stated that the Appellant
had the following options:
·
Purchase a Payout Annuity with the maturity
value as stated in your policy provisions. If this option is elected, the
taxable gain would be spread out over the duration of the income period you
select. The purchase date for the Payout Annuity must be the same day as the
maturity date. Future policy changes or refunds will not be allowed once an
income is selected.
·
Transfer the funds
into one of Clarica’s Guaranteed Savings contracts. If this option is elected,
the taxable gain would be reported to you in the year of maturity.
·
Issue a cheque for
the maturity value of $30,004.50. The approximate taxable maturity gain of
$17,593.12 will be reported to you as the policyholder in the year of maturity.
[7]
The Appellant advised
Sun Life that he wished to receive the sum of $30,004.50 and a cheque in this
amount was issued to him by Sun Life sometime in November or December 2006.
[8]
Sun Life issued a T-5
Statement of Investment Income to the Appellant (Exhibit A-4). In the Statement
the amount of $17,593.12 is referred to as “Interest from Canadian Sources”.
[9]
The
Appellant testified that he did not receive the T-5 Statement issued by Sun
Life before he filed his income tax return for the 2006 taxation year and
therefore he did not report any portion of the payment received by him from
Sun Life in computing his income for the 2006 taxation year. The Appellant
said that his mail is delivered by Canada Post to a community post office and during
the fall of 2006 some of the mail in the community mail box was taken by vandals.
[10]
The
Respondent accepts the Appellant’s position regarding theft of mail from the
community mail box but maintains that the Appellant is required to include the
amount of $17,593.12 in his income for the 2006 taxation year.
B. Issue
[11]
The issue is whether
the Minister of National Revenue (the “Minister”) properly determined that the
Appellant failed to report Investment Income of $17,593.12 that he received
from Sun Life.
C.
Analysis and Decision
[12]
During the hearing the
Appellant agreed that the amount of $17,593.12 is taxable, and should therefore
be included in his income for the 2006 taxation year. However, the Appellant
says that the amount of $17,593.12 should be recognized as dividend income,
rather than as “Interest from Canadian Sources”. The Appellant said that he
understood he would be taxed at a lower rate if the amount of $17,593.12 were treated
as dividends.
[13]
The Respondent
maintains that the amount of $17,593.12 is properly included in the Appellant’s
income as investment income, pursuant to subsection 148.(1) of the Income
Tax Act (the “Act”).
[14]
Paragraph 56.(1)(j) of
the Act reads:
56. (1) Amounts to be included in income for year – Without restricting the generality of section 3,
there shall be included in computing the income of a taxpayer for a taxation
year,
…
(j) Life insurance policy proceeds – any amount required by subsection
148(1) or 148(1.1) to be included in computing the taxpayer’s income for the
year;
…
[15]
Subsection 148.(1)
reads:
148. (1) Amounts included in computing policyholder’s
income – There shall be included in
computing the income for a taxation year of a policyholder in respect of the
disposition of an interest in a life insurance policy, …
…
the amount, if any, by which the proceeds of the disposition of the
policyholder’s interest in the policy that the policyholder, beneficiary or
assignee, as the case may be, became entitled to receive in the year exceeds
the adjusted cost basis to the policyholder of that interest immediately before
the disposition.
[16]
In Patel v. Canada,
[1999] T.C.J. No. 847, Justice Dussault of the Tax Court of Canada explained
the application of these sections of the Act as follows:
7.
Paragraph 56(1)(j) of the
Income Tax Act (the “Act”) provides that there shall be included in computing
the income of a taxpayer for a taxation year any amount required to be so
included by subsection 148(1) or (1.1) of the Act.
8.
Basically, and subject to
certain exceptions, subsection 148(1) of the Act provides for the inclusion in
income of the amount by which the proceeds of the disposition of a
policyholder’s interest in a life insurance policy exceeds the adjusted cost
basis of that interest immediately before the disposition.
[17]
Essentially, paragraph
56.(1)(j) and section 148 of the Act provide that certain proceeds of
life insurance policies must be included in a taxpayer’s income as “Other
Sources of Income”. These sections do not provide that the proceeds received
from life insurance policies are to be recognized as dividend income.
[18]
The Appellant agrees
that the amount of $17,593.12 represents the difference between the proceeds of
disposition of the Policy ($30,004.50) and its adjusted cost basis
($12,411.38). These amounts were calculated by Sun Life using the prescribed
formulas under their respective definitions in subsection 148.(9).
[19]
I have carefully
reviewed the documents with respect to the Policy held by the Appellant. It
appears that certain “dividends” were allotted to the Appellant during each
year that he held the Policy (Exhibit A-3). However, those dividends were
re-invested by Sun Life or its predecessors into the insurance policy, and were
allotted to be “used to purchase additional paid-up insurance” (Exhibit A-3).
[20]
The relevant parts of
the definition of the “adjusted cost basis” and “proceeds of disposition” under
subsection 148.(9) read as follows:
"adjusted
cost basis" to a policyholder as at a particular time of the policyholder's
interest in a life insurance policy means the amount determined by the formula
(A + B + C + D + E +
F + G + G.1) - (H + I + J + K + L)
where
…
B is the total of
all amounts each of which is an amount paid before that time by or on behalf of
the policyholder in respect of a premium under the policy, other than amounts
referred to in clause 148(2)(a)(ii)(B), in subparagraph (iii) of the
description of C in paragraph (a) of the definition "proceeds of the
disposition" or in subparagraph (b)(i) of that definition, …
…
“proceeds of the disposition” of an interest in a life insurance policy means the amount of the
proceeds that the policyholder, beneficiary or assignee, as the case may be, is
entitled to receive on a disposition of an interest in the policy and for
greater certainty, …
[21]
Therefore, the
dividends that were allotted to the Appellant, which were used to purchase
additional paid-up insurance, would be included in the calculation of the Policy’s
adjusted cost basis, by virtue of item “B” under the definition of that phrase.
This provision ensures that when the adjusted cost basis is subtracted from the
proceeds of disposition, pursuant to subsection 148.(1) and paragraph 56.(1)(j),
the amounts relating to the “dividends” previously received by the Appellant
would not be included in the taxable amount. Therefore, the amount of
$17,593.12 does not include any amounts relating to the dividends that were
allotted to purchase additional paid-up insurance. There is no evidence to
suggest that a mistake had occurred in the calculation of the amount of
$17,593.12. I have therefore concluded that no portion of the amount of
$17,593.12 can be recognized as dividend income.
[22]
The Appellant also maintains
that it was incorrect for Sun Life to categorize the amount of $17,593.12 as
“Interest from Canadian Sources”, since there is no mention of “interest” or
“interest rate” on any of the Policy’s documents. I find the facts in Lalonde
v. Canada, [1997] T.C.J. No. 1268, to be analogous to the current appeal.
In that case, the Appellant received interest and dividend payments each year
from his life insurance policy, which were both automatically re-invested in
the policy. During each of those years, the Appellant properly included the
interest income in his taxable income. Upon the disposition by the Appellant of
his interest in that policy, the insurance company issued him a T-5 Slip that
recognized an amount of $5,839.87 as “interest income”. In paragraph 19 of that
Judgment, Justice Lamarre Proulx of the Tax Court of Canada explained:
As regards the
amount in dispute, namely $5,839.87, although it was entered in the “Interest”
box on the T5 form, this does not in any way mean that it was the same kind of
interest that the appellant had received each year and on which he had already
paid tax. In fact, the $5,839.87 resulted from the subtraction of the adjusted
cost basis of the policy from the proceeds of the disposition of the policy,
and this is a result I must accept since there was no evidence to the contrary
about the amount of the proceeds of the disposition or the adjusted cost basis.
In other words, $5,839.87 is the amount by which the proceeds of the
disposition of the appellant’s interest in the insurance policy exceeded the
adjusted cost basis of that interest.
[23]
Similarly, the amount
of $17,593.12 is not the same in nature as the “dividends” that the Appellant
received during each year that he held the Policy. Similarly, it is also not
“interest” income in the usual sense of the word. Instead, it is a specific
form of investment income, for which the taxable amount is arrived at by
application of the formulas under paragraph 56.(1)(j) and section 148 of the Act,
upon the Appellant’s disposition of his interest in the Policy. Although Sun
Life labelled the amount of $17,593.12 as “Interest from other Canadian
Sources” on the Appellant’s T-5 Statement, the end result of including the full
amount in the income of the Appellant is correct. In any case, the Act does
not provide for any dividend tax credits or a lower tax rate for this type of
investment income.
[24]
Since there is no
contrary evidence relating to the “proceeds of disposition” and “adjusted cost
basis” of the Appellant’s interest in the Policy, I conclude that the amount of
$17,593.12 is properly included in the Appellant’s income as investment income,
pursuant to paragraph 56.(1)(j) and section 148 of the Act.
[25]
The appeal is
dismissed, without costs.
Signed at Vancouver, British Columbia, this 23rd day of April 2009.
“L.M. Little”
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